In a significant breather for non-banking finance companies, especially gold loan companies, the Reserve Bank of India has allowed them to give higher amount of loan against gold jewellery pledged by borrowers.

NBFCs can now give up to 75 per cent, up from 60 per cent now, of the value of the gold jewellery pledged as loan.

The RBI has raised the cap with immediate effect in view of the moderation in the growth of gold loan portfolios of NBFCs in the recent past, and also taking into consideration the experience so far.

In March 2012, the RBI had directed NBFCs not to give more than 60 per cent of the value of gold jewellery pledgedin view of the rapid pace of their business growth and the nature of their business model, which has inherent concentration risk and is exposed to adverse movement of gold prices.

The central bank said the value of the jewellery, for the purpose of determining the maximum permissible loan amount, will be only the intrinsic value of the gold content therein, and no other cost elements, such as making charges, should be added thereto.

Ownership

In view of the fact that it may not be possible for borrowers to produce receipts establishing ownership, especially when the jewellery has been inherited, the RBI clarified that the ownership verification need not necessarily be through original receipts for the jewellery pledged.

For verification, a suitable document could be prepared to explain how the ownership was determined, particularly in cases where the gold jewellery pledged by a borrower at any one time or cumulatively on loan outstanding is more than 20 gm. NBFCs have been directed to put in place an explicit policy in this regard.

Purity

The RBI emphasised that the need to give a certificate on the purity of gold cannot be dispensed with. The certified purity shall be applied for determining the maximum permissible loan and the reserve price for auction. The NBFCs can, however, include suitable caveats to protect themselves against disputes on redemption.